How Accurate is the Appraisal?

The best method of determining the value of a house is an arm’s length sale,1 yet many times a sale of the property is unavailable. With residential financings, estate or real estate tax assessments, parties typically turn to appraisals. Just because an appraisal was done, does that mean it is reliable? Appraisals have strengths and weaknesses. This article is written to help an attorney evaluate whether or not any particular appraisal really is an accurate estimate of house value.
Here is an example. A full value mortgage was given on a house with an appraised value of $425,000. Debtor dies four months later and house goes into foreclosure. Estate attorney has another appraisal, a few months later, with a value of $250,000. Bank attorney commissions a new appraisal a year or so later with a value of $150,000 for the same house.2 Appraisals are suppose to have a margin of error of less than 10%. What was the problem? All the appraisals were wrong. The house was really a tear down and worth only land value around $50,000-60,000. This value was reached because the house was in Nassau County, built in the 1930’s with significant lack of maintenance and no substantial modernization since the 1960’s. The appraisals failed to address these facts and adjust the comparable sales to the subject premises. This situation will be used to illustrate common problems with appraisals in this article.
Most appraisals start with a general description of the neighborhood and range of values. This section should be used for general guidance only because normally no information on how the conclusions were reached is included. Next, a particular description of the subject premises follows including pictures. This portion must be examined carefully. Renovations and modernizations are not typically evaluated seriously. Careful review of the features, condition and when the renovation was finished need to be noted. This review applies both to the subject premises’ and comparable sales used in the appraisal.
Generally, the newer the house, the more it is worth, all other things being equal. In Nassau County many houses are older and have gone through major modernization at different times. Because a house was built in 1926, does not mean it has not been modernized. Recent major modernization/renovations can have values approaching those of new houses. A review of the pictures of the subject premises’ answers one half of the question, i.e. the extent of modernization for the subject premises.
The key factor is looking at the date of original construction and compare what was common then and what you see today. An “educated guess” can be made for the dates of modernizations by looking at the picture. Look for features not common or available when the structure was built. People rarely spend thousands of dollars on the exterior or landscaping while leaving the interior un-touched. For example, consider a 1938 house, it commonly has wooden screens and storm windows with single paned windows. Perhaps it has gray aluminum storm windows (1950’s), colored storm windows (1960’s) or double paned glass (1970’s to date)? In this way, windows, front doors, or skylights can give a hint on when the house was modernized. In addition, look at the general exterior condition. Have the architectural features changed from one portion of the house to another? Extensive landscaping, newly paved driveways or HVAC units are also hints on the condition inside the house. The next portion of the appraisal is the comparable sales area. A written description of the comparable sales with a street view of the front exterior is provided. Review the construction date(s),3 style, size of the house and lot, position on parcel, number of bathrooms and bedrooms. Remember if something looks awkward, the marketplace reflects the awkwardness. For example, a two story house with a single bathroom reflects this “awkwardness.” The closer the comparable sales are to the subject premises, the better the likelihood of a good appraisal. These items are fairly easy to compare and adjustments should be taken for differences.
Appraisers use monetary amounts called “adjustments” for differences and place standard values on these differences. Normally buyers place a value on a house based on an overall impression and the marketplace, not precise individual differences. Therefore adjustments should be used as a guide. The most reliable appraisals are those that compare “like to like.” This portion needs to be reviewed carefully. Did the appraiser compare “apples to apples” or was it “apples to oranges”? The answer to this question can be difficult and many times involves guesswork. Appraisers rarely have a substantial background in building and real estate sales. The lack of this background causes some appraisals to be inaccurate. If errors appear it is typically in this area.
A typical example is an adjustment between one and two bathrooms between the subject premises’ and comparable sales. A figure of $5,000 to $10,000 is common. This figure could be way off. It assumes minimal structural, electrical or plumbing work is needed.4 If the subject premises’ is old, or in disrepair, this figure could be very low. Simply look at the photographs. In addition, from a brokerage perspective, a house with a single bathroom and two stories is worth less than a two-story house with two bathrooms. Appraisals typically do not adjust for bathroom location.
What about the condition of the comparable sales? Appraisals have a front exterior picture only. If you do not have houses with the same modernization and age, you could be comparing “apples to oranges.” Many times this area is where errors occur. Attorneys can easily acquire enough information to equaluate this situation.
Just how does anyone acquire this construction information? Look around your neighborhood at other houses. Compare the dates of construction, what has been modified and when the modifications were made. Ask your friends how their house has changed and when since it was built. Go to a home supply store and look at what is sold. Ask when these styles or items became common and range of costs. For example, storm doors/windows are out of fashion, yet are still available in different styles to match different ages of house styles. Front doors have changed as well.5 Double paned windows have replaced storm windows. These items are expensive. If an owner changed these exterior features isn’t it probable a modernization was done in other areas?6 Today, for major modernizations, owners typically modernize windows, kitchens, bathrooms, plumbing, electric and add AC systems. Sometimes bedrooms or closets are enlarged and rooms added. If the exterior front of a house is modernized, isn’t it likely the interior was done as well? If modernization is not apparent on the outside, perhaps it is not present on the inside. Unfortunately appraisals rarely pick up on these changes and an “apple to orange” comparison is made. In addition, not all houses have had complete makeovers. If there has been some exterior modernization how recent and extensive is it? That is where an appraiser must make an “educated guess!” Without a significant background in building or architecture, the appraiser may not understand what he/she is looking at or the modifications significance.
Style and location of the subject premises’ and the comparable sales must also be considered. Examples are locations near commercial/industrial areas, railroads, busy streets, airports, schools, parks, waterfront, water view, etc. How would a buyer look at the premises compared to other places without the nearby feature? These locations typically require an adjustment. Typically appraisers use standard adjustments for these differences. Is the standard adjustment adequate? Some adjustments are rarely used. For example, houses that are facing sideways are not as popular as houses facing forward. Corner lots and Tudor style houses typically sell for premiums. If these conditions appear with either the subject premises’ or a comparable sale and not the other, additional adjustments are needed.
Nassau County is mostly developed and new houses are normally built by tearing down old, small, or poorly maintained houses and replacing them. In addition, sometimes a larger than average parcel would allow a much larger house to be built, even if the house is in good condition. If the subject premises’ falls into one of these categories, the condition of the house is irrelevant. It needs to be treated as a building lot. The subject premises’ would have more value to a builder than someone who simply wanted to live in it. Many times an area tax map is provided with the appraisal. Look at the size of the houses and parcels. This map can give an idea about whether or not the subject premises’ parcel belongs in this category.
If the house is a tear down, do not use the figure in the appraisal for land value on an existing house. This figure is based on a formula that may not properly apply. The better approach is to find out what builders are paying for building lots in any particular area. If necessary, call the local building dept. and ask for names of builders or locations of new homes in the area. Contact them or look up the sales at the County Clerk’s office.
Returning to the original example. In that neighborhood the original appraisal value could only be supported by a new or completely modernized house. The subject premises’ was not new. In addition, the roof was missing singles. If a house had roof problems isn’t it probable that there were other lack of maintenance issues? All the appraisals failed to properly account for the condition of the house. The last appraisal compared this house to houses that were newer, showed evidence of being modernized and properly maintained. For example, the pictures showed a front door and window style not common or available when these houses were built and well maintained front yards. It was an “apples to oranges” comparison as the subject premises was older and not properly maintained, If the appraisers picked up on the differences by following the guidance in this article, their errors would have immediately been apparent and a proper value established.
A good appraisal can be very helpful to determine fair market value when no actual sale is appropriate. When an attorney reviews an appraisal, it is important to understand it’s limitations and strengths. Any attorney, with a little investigation, can acquire enough knowledge to ask the proper questions. If something seems unusual, questions need to be asked. Remember, an appraisal is a “guess,” hopefully an “educated guess” at value.
George P. Frooks, Esq., SCAR Hearing Officer and Licensed Real Estate Broker is certified to enforce the N.Y.S. Uniform Fire Prevention and Building Code.
1. “A recent sale of the subject property between a seller under no compulsion to sell and a buyer under no compulsion to buy is preferred as the most reliable measure of a property’s full value. Where no sale is available other types of evaluation are used like comparable sales, capitalization or replacement cost,” In the matter of FMC Corporation v. David Unmack, as Assessor of Town of Tonawanda, et al, 92 N.Y. 2d 179, 699 N.E.2d 893, 677 N.Y.S.2d 269 (1998).
2. Appraisals are guesses, hopefully educated guesses with a margin of error of 10%.
3. Building permits for modernizations may or may not be included, either with the subject premises’ or the comparable sales.
4. Go to a home supply store and price finish items like toilets, bathtubs, sinks, fixtures, tile, etc. The range of prices is considerable. Add labor, structural, plumbing or electrical work and the price goes higher.
5. Roughly 30 years ago medal doors with insulation inside became common and are still available, now wood doorway are in fashion. 6. Ask your spouse if you could spend $15,000 on landscaping, doors or windows alone while leaving the kitchen or bathrooms old. Remember standing alone storm or double paned windows may not be a conclusive indication of significant modernization as these windows can save homeowners on utility bills and may have been the only significant modernization.